The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day. FIGURE 12- 7
-Refer to Figure 12- 7. Suppose this firm is being regulated using a pricing policy of average- cost pricing. In this case, economic profits are equal to
A) $0.
B) $10 000.
C) $6000.
D) $126 000.
E) $28 000.

Question

The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.  FIGURE 12- 7
-Refer to Figure 12- 7. Suppose this firm is being regulated using a pricing policy of average- cost pricing. In this case, economic profits are equal to
A) $0. 
B) $10 000. 
C) $6000. 
D) $126 000. 
E) $28 000.

Quizplus · Accepted Answer

Under average-cost pricing, the firm sets the price equal to the average total cost (ATC). In this case, the ATC is $0.06/kWh at the profit-maximizing quantity of 7,000 kWh per day. Therefore, the price is set at $0.06/kWh, which is also the minimum point on the ATC curve. At this price, the firm is earning zero economic profit (total revenue = total cost), as shown by the horizontal distance between the ATC and demand curves at the quantity of 7,000 kWh per day. Therefore, the correct answer is A) $0.

The Diagram Below Shows Cost and Revenue Curves for a Natural